Venezuela faces daunting challenges

Caracas would need oil at $117.5 a barrel to get out of a bitter recession. The government of Nicolas Maduro is taking advantage of its good standing with Russia to extract as much strategic benefit from the output deal as possible

The past decade, in which prices were consistently pushing $100 a barrel or more, was for Venezuela a golden age of filling its coffers with oil revenue. By itself, the deal made between OPEC and non-OPEC oil exporters late last year will fall far short of fixing the Venezuelan economy, even if it succeeds in keeping prices above $65 a barrel. Comparing OPEC and IMF data, it appears that in order for the country to balance its budget, the price of oil would have to be $117.5 a barrel.

The state of the economy

#oil is over 90% of Venezuela's total #exports

Oil is fundamental to the Venezuelan economy, which is in a recession that the IMF estimates at 12% of the country’s GDP in 2016. The situation is made worse by consumer prices rising at rates in the triple digits. These numbers are more concerning to Caracas than short-term action on crude prices. As a consequence, Venezuela is one of the few countries that have failed to meet output cut quotas, albeit by a small margin: 2.01 million bpd instead of the 1.98 million allowed for under the agreement (S&P Global Platts numbers). The commitments of Saudi Arabia and Angola alone offset it. Nicolas Maduro’s government is working hard to get as much strategic benefit out of the deal for itself as possible. In order to do so, it is leveraging a strong relationship with Russia, the real protagonist of the agreement, which has managed to open a channel of communication between OPEC and non-OPEC members. Caracas placed strong emphasis on diplomatic work with Moscow in the weeks leading up to the signing of the agreement and is one of five member countries of the Joint OPEC non-OPEC Ministerial Monitoring Committee (JMMC). The JMMC will meet on a monthly basis to review progress. Russia’s umbrella is also badly needed to shelter the Maduro government somewhat from trouble ahead, if it’s true that the country’s national oil company PDVSA is on the brink of default, as Fitch Ratings maintains. That would be a shocking outcome, considering that Venezuela’s proven oil reserves are the largest in the world. However, the days of plenty are over. When Hugo Chavez first came to power in 1999, Venezuelan oil was priced at $16 a barrel, and between 2011 and 2014 it shot up to between $84 and $103. Between 1999 and 2014, the country collected an average of $56 billion a year. In 2015, when prices were already dropping (but nowhere near 2016 levels), that revenue went down to $12 billion. The Bolivarian government has used those vast sums to fund ambitious social programs aimed at eradicating poverty - with successes recognized even by the World Bank - and rallying support in view of upcoming elections. Critics of the regime contend the money has also been used to grease the wheels of an increasingly circular power apparatus. In any case, precious little remains in the government’s coffers, and now that the oil money faucet has been turned down to a trickle, they are being emptied fast.

Drilling rigs are seen at an oil well operated by Venezuela's state oil company PDVSA, at the oil rich Orinoco belt, are 54,000 square feet in size that runs along the Orinoco River near Morichal.

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In the picture Venezuela's Oil Minister Nelson Martinez (L) and Eulogio del Pino, president of Venezuelan state oil company PDVSA, attend the swear in ceremony of the new board of directors of Venezuelan state oil company PDVSA in Caracas, Venezuela January 31, 2017

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Comparing OPEC and IMF data, it appears that in order for the country to balance its budget, the price of oil would have to be $117.5 a barrel. In the picture the President of Venezuela Nicolas Maduro and OPEC Secreatyr General Mohammed Barkindo during their last meeting in Caracas on January 16, 2017

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A lack of resources

The funds are lacking for keeping Venezuela’s oil machine running, much less for modernizing it, to the point that before the signing of the cuts deal some analysts predicted that the country would have no problem cutting production. This is disastrous for a country whose exports are 90% oil. Citing PDVSA documents, Reuters reports that the company is months behind on oil shipments to Russian and Chinese state firms worth $750 million as part of a loans-for-oil scheme that threatens to further exacerbate the Latin American country’s budgetary vicious cycle. The government’s creditors are alarmed by the liquidity crisis, but so far Caracas has honored all its debts. In the golden years, the government and PDVSA took advantage of high profit margins to issue large quantities of bonds, running up a debt that, according to Econoanalitica, may reach $93 billion in 2017. Some $9 billion worth of bonds will mature this year, mainly in April and October. Rainy day funds that totaled more than $40 billion in 2008 have dwindled to just $11 billion, severely limiting the country’s purchasing power for importing basic goods. This problem in its turn contributes to staggering inflation against which neither printing money nor repeated salary increases seem to be having any effect. However, Maduro is not giving up. Addressing leaders of other countries that signed the output deal in January, he promised a new plan to stabilize crude prices on international markets. It’s difficult to imagine a Venezuelan recovery any time soon, even in that scenario.

Venezuela has been one of just a few nations that failed to comply with agreed-upon production cut quotas, albeit by a small margin: 2.01 million bpd, compared to 1.98 million allowed by the deal